Following the judgments by the Court of Justice of the European Union (CJEU) in both MEO and Vodafone Portugal, we have seen tax authorities changing their approach with regards to the treatment of termination payments from a VAT perspective.

The judgments in these cases led to the deletion, effective from 1 January 2022, of section 74(4) of the Value-Added Tax Consolidation Act 2010, which allowed businesses claim VAT relief on forfeited deposits. In October 2022 Revenue confirmed that in cases where a pre-payment or deposit is received before completing a vatable supply of goods or services, a supply is deemed to have taken place at the time the business receives such payment. They also stated that VAT is chargeable at the time of receiving the payment and businesses should account for VAT and pay it to Revenue via the submission of periodic VAT returns.

With regard to deposits or prepayments received prior to 1 January 2022 Revenue stated that they would continue to benefit from the VAT relief in so far as the following requirements set out in Section 74(4) are met:

• The supply does not take place because the customer has cancelled it
• The cancellation is noted as such in the supplier’s books and records
• The deposit is not refunded to the customer, and
• No other benefit is provided to the customer in lieu of that amount.

Let’s briefly go through the landmark cases produced by the ECJ in relation to the VAT treatment of termination payments and forfeited deposits.

Société thermale d’Eugénie-les-Bains

In this case (C-277/05) the CJEU considered that the deposit received by the hotel, in the context of a contract relating to the supply of hotel services which is subject to VAT, where the customer exercises the cancellation option available to him and that sum is retained by the hotel as a fixed cancellation charge paid as compensation for the loss suffered by the hotel as a result of the client’s cancellation and when there is no direct connection with the supply of any service for consideration, has to be treated as outside the scope of VAT.

MEO and Vodafone Portugal ECJ

In MEO (C-295/17), the CJEU ruled that payments made following an early termination of a contract for the provision of telecommunication services were subject to VAT. In its judgment the Court held that where the customer decides to cancel the contract before the stipulated minimum length and was obliged to pay a fixed amount equal to the fees charged on a monthly basis until the end of the minimum contracted period, the payment was liable to VAT. The Court held that the supplier was receiving further consideration for the right to receive the services and the fact that the customer chose not to make use of that supply was is irrelevant if the supplier made the service available.

In Vodafone Portugal (C-43/19), which also dealt with VAT treatment of payments following early termination of a contract but differed from Meo as the payments did not enable Vodafone to receive the same amounts that it would have received if the customer had not terminated the contract early, the CJEU held that the amount payable in the event of early termination must be considered an integral part of the price which the customer committed to paying the provider to fulfil its contractual obligations and was therefore consideration and subject to VAT.

The CJEU reiterated the well-established position that a supply of services is carried out ‘for consideration only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the actual consideration for an identifiable service supplied to the recipient. That is the case if there is a direct link between the service supplied and the consideration received.

As regards the direct link, the Court has held that the consideration for the price paid at the time of the signing of a contract for the supply of a service is formed by the right derived by the customer to benefit from the fulfilment of the obligations arising from that contract, irrespective of whether the customer uses that right. Thus, that supply is made by the supplier of services when it places the customer in a position to benefit from the supply, so that the existence of the abovementioned direct link is not affected by the fact that the customer does not avail himself or herself of that right.

Next steps

In addition to the changes to the VAT treatment of deposits we expect that Revenue’s position following the decisions of the ECJ in Meo and Vodafone Portugal is generally that termination payments are further consideration for the right to receive the underlying goods or services and are therefore subject to VAT. This has been Revenue’s position in practice for many years now.

Notwithstanding the judgments of the CJEU in the cases of Meo and Vodafone Portugal we are of the view that where a deposit is forfeited in advance and no service ever commenced the deposit should still be outside the scope of VAT based on the logic set out by the CJEU in Eugenie Le Bains, which the Court’s recent judgments have not disturbed. However, businesses that adopt such a position carry the risk of Revenue challenge.

In conclusion, businesses should review their termination payments including deposits to establish whether or not, on the basis of case law and the recent changes to VAT legislation, the payments are subject to VAT.

If you have any questions on this matter, please do not hesitate to get in touch with Daniel Baquerin or any of the team below.